1. Registration

1.1 Are funds that are offered to the public required to be registered under the securities laws of your jurisdiction? If so, what are the factors and criteria that determine whether a fund is required to be registered?

Yes. As a rule, Brazilian-formed investment funds are required to be registered with the local securities commission (Comissão de Valores Mobiliários – “CVM”), regardless of their quotas being subject to a private or public offering. The rules and requirements for the registration of investment funds are set forth by the CVM and are generally determined based on the type of investment funds, target investors and type of public offerings.

1.2 What does the fund registration process involve, e.g., what documents are required to be filed?

The registration of public funds in Brazil requires prior registration with the CVM through the filing of a minimum set of documents, which is made by the fiduciary administrator through the CVM’s website, such as: (i) the fund’s bylaws; (ii) the enrolment of the fund with the Federal Revenue Office taxpayer’s register; (iii) the statements of the fund’s fiduciary administrator attesting the compliance of the fund’s bylaws with the applicable regulations, as well as the execution of certain required agreements (i.e., portfolio management agreements, bookkeeping of quotas, distribution and custody, etc.); and (iv) the name of the independent accounting firm responsible for auditing the fund’s financial statements, among others.

1.3 What are the consequences for failing to register a fund that is required to be registered in your jurisdiction?

Under the applicable laws, the distribution of quotas of investment funds not registered with the CVM is classified as a serious infraction (infração grave), being subject to the following penalties:

warning;

financial penalty;

temporary disqualification, up to a maximum period of 20 years, for exercising the duties of a director or member of the audit committee of listed companies, entities which are part of the securities distribution system, or other entities that depend on authorisation or registration with the CVM;

suspension of the authorisation or registration to perform activities related to capital markets;

temporary disqualification, for a maximum period of 20 years, from performing activities related to capital markets;

temporary prohibition, for a maximum of 20 years, from performing certain activities or transactions for entities that are part of the securities distribution system or other entities that depend on authorisation or registration with the CVM; and/or

temporary prohibition, for a maximum period of 10 years, from directly or indirectly performing in one or more types of transactions in the securities market.

1.4 Are there local residency or other local qualification requirements that a fund must meet in order to register in your jurisdiction? Or are foreign funds permitted to register in your jurisdiction?

Foreign-formed investment funds are not admitted to registration in Brazil, nor may their interests be publicly offered in Brazil.

2. Regulatory Framework

2.1 What are the main regulatory restrictions and requirements that a public fund must comply with in the following areas, if any? Are there other main areas of regulation that are imposed on public funds?

i. Governance

Investment funds in Brazil are structured as a special unincorporated pool of assets (condomínios especiais), with the investors participating in the fund through the acquisition of quotas, each of which corresponds to a notional fraction of all assets held by the relevant fund. Brazilian-formed funds are not incorporated as legal entities (i.e., companies, partnerships or trusts), but can assume duties and obligations towards third parties, as well as sue and be sued. As a consequence of being an unincorporated pool of assets, local investment funds are not considered separate and independent legal entities from their investors.

Brazilian investment funds may be formed as closed-ended or open-ended funds. In closed-ended funds the quotas cannot be redeemed prior to its liquidation, with distributions to quota holders being made through the amortisation of quotas, generally approved by the fiduciary administrator or the investment manager. Quotas of closed-ended funds may be subject to secondary negotiation among the quota holders. Paradoxically, open-ended funds allow their investors to redeem their quotas at any time, regardless of the fund’s liquidation, but prohibit the secondary transfer of quotas (except in case of judicial order, universal succession, collateral foreclosure, fiduciary assignment, etc.).

The principal document of an investment fund is the bylaws, filed by the fiduciary administrator, which contains the description of the investment policy, term, target investors, service providers, characteristics of the quotas and distributions to quota holders, fees, governance and quota holders meetings, among others. The fiduciary administrator is the primary person responsible for the fund and is subject to the terms and conditions set forth in the bylaws, also being responsible for the engagement and supervision of any of the fund’s service providers, such as the investment manager, custodian and distributor, as applicable.

The investment decisions in public funds are generally taken by the investment manager, subject to the investment policy set forth in the bylaws.

The investors participate in local formed funds through the quota holders’ meetings, which are responsible, under the terms of the regulations, for resolving certain matters, such as: (i) approval of the fund’s financial statements; (ii) replacement of the fiduciary administrator, investment manager and/or custodian; (iii) merger, spin-off or transformation of the fund; (iv) increase of the fund’s fees; (v) changes to the fund’s investment policy; (vi) for closed-ended funds, issuance of new quotas; (vii) amortisation or redemption of quotas in the absence of specific language in the bylaws; and (viii) amendment to the bylaws. Additional matters subject to resolution by the quota holders’ meetings may be included in the bylaws.

Local investment funds may also have investment or technical committees or boards, formed by members appointed by the administrator, investment manager or quota holders, pursuant to the terms of the fund’s bylaws. The existence of committees or boards does not exempt the fiduciary administrator and the investment manager of their obligations with respect to the operations and management of the fund’s portfolio.

ii. Selection of investment adviser, and review and approval of investment advisory agreement

The fiduciary administrator is responsible for selecting and engaging the fund’s service providers, including the investment manager, which shall be duly authorised by the CVM for the exercising of investment management activities (see question 2.2). The engagement of the investment manager is formalised through an investment management agreement, privately negotiated and executed by the parties (fiduciary administrator, investment manager and the fund). Such agreement is not filed with the CVM nor made available to the public in general, but may be requested at any time for analysis and consultation by the CVM.

iii. Capital structure

Brazilian law does not provide for capital structure rules to public funds in Brazil. The general rule is that all the quota holders, participating in the fund with a fraction of its assets and holding the same type of quotas, must be treated equally, holding the same rights and obligations.

The local laws allow the possibility of establishing that the liability of each quota holder is limited to the amount of its quotas – provided that such limitation is expressly determined by the fund’s bylaws. For comparison purposes, this approach is similar to the limited liability of shareholders of corporations and limited liability companies in Brazil. It is worth highlighting that the limitation of liability in an investment fund that was originally formed without such limitation will only cover facts that occurred after the respective change of its bylaws.

iv. Limits on portfolio investments

In general, the limits on portfolio investments made by public funds in Brazil are determined by two main factors: (i) the type of public investment fund (if an equity fund, fixed-income fund, foreign exchange fund, or multimarket fund, among other additional classifications); and (ii) the level of sophistication of the fund’s investors.

The CVM regulations establish certain rules with respect to the types of assets that may be purchased and traded by public funds, as well as concentration limits in respect of: (a) the issuer of each of the assets; (b) the type of financial assets; and (c) offshore investments.

The rational is that, subject to the limitations imposed to each of the specific types of public funds, the more sophisticated the investor, the more flexible the public fund’s investment policy in relation to the types of assets and concentration limits. Thus, public funds targeted to qualified and/or professional investors (see question 2.1 (vii) below) require higher investment standards from such investors (and entail higher risk exposure) than those targeted to retail investors.

v. Conflicts of interest

The CVM regulations contain certain rules applicable to the fiduciary administrator, investment manager and distributors in relation to conflict of interest. As a general rule, service providers (and any members of the fund’s committee or advisory board, if applicable) must disclose situations involving potential conflict of interest, as well as the policies and procedures for mitigating such situations.

The fiduciary administrator and investment manager are required to prepare and adopt rules and policies in relation to compliance, risk management, internal controls, and ethics code, among others.

The fiduciary administrator and the investment manager are also subject to specific segregation rules imposed by the CVM regulations, which usually involve physical and information segregations, as well as the appointment of different officers responsible for the investment management, risk management and compliance.

vi. Reporting and recordkeeping

The fiduciary administrator has the primary responsibility for reporting and recordkeeping the fund’s information, including information about the value of the fund’s quotas, fund’s portfolio, performance and material facts, among other information. Most of the information is made available not only to the quota holders, but to the CVM and the public in general (available on the CVM’s website).

The local regulations determine that the fiduciary administrator keeps certain documents for a minimum period of five years, such as accession instruments executed by the quota holders, any communications exchanged by the fiduciary administrator and the quota holders, executed agreements and auditing reports, among others.

vii. Other

The CVM regulations classify the investors into three categories, as follows: (i) retail (non-sophisticated investors); (ii) qualified investors; and (iii) professional investors. This classification is relevant for purposes of determining the public funds’ investment policies (see question 2.1 (iv) above).

There is no specific definition for retail investors, meaning that retail investors are those that do not fall under the categories of qualified or professional investors.

On the other hand, qualified investors are those individuals or companies that hold financial investments in an amount of, at least, R$1 million, investment clubs managed by quota holders classified as qualified investors, as well as natural persons certified by entities accredited by the CVM.

2.2 Are investment advisers that advise public funds required to be registered and/or regulated in your jurisdiction? If so, what does the registration process involve?

Yes. The administration and investment management of investment funds in Brazil are regulated activities, being subject to registration with the CVM. The registration request can be required in one or both of the following categories:

Fiduciary administrator (administrador fiduciário), responsible for the operation and maintenance of the securities portfolio, which is responsible for, among others: (a) legally forming investment funds under its administration and registering them with the Federal Revenue Office and CVM; (b) hiring investment providers which are legally required for the operation of securities portfolios and/or investment funds (i.e., portfolio managers, custodians, bookkeeping agents, etc.); and (c) treasury, accounting, custody of assets and other back-office activities.

Investment manager (gestor), responsible for the investment decisions (including purchase and sale) of the securities portfolios and/or investment funds, and/or for securities consulting services with respect to investments and divestments in securities.

Note that both the fiduciary administrator and the investment manager must be necessarily headquartered in Brazil and are subject to minimum infrastructure and disclosure requirements (filing and annual update of a reference form with information on asset under management, infrastructure, remuneration, internal policies, etc.). Additionally, both the fiduciary administrator and the investment manager are required to, at least, appoint an officer responsible for the asset management activities (who is also required to be registered with the CVM as an individual asset manager), and an officer responsible for compliance and risk management and anti-money laundering.

In addition to the registration with the CVM, it is a local market standard that an asset manager is also registered with the Brazilian Financial and Capital Markets Entities Association (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais – “ANBIMA”) in order to perform asset management activities. Broadly speaking, the registration with ANBIMA may be formalised through two different approaches: (i) becoming a member of ANBIMA – enjoying associative rights, with mandatory adherence to the ANBIMA’s self-regulatory codes; or (ii) adherence to the applicable ANBIMA’s self-regulatory codes.

2.3 In addition to the requirements above, are there additional regulatory restrictions and requirements imposed on investment advisers that advise public funds?

In addition to the requirements above, fiduciary administrators and investment managers are subject to self-regulatory rules set forth by ANBIMA, and anti-money laundering rules and reporting obligations. Fiduciary administrators and investment managers may be also subject to additional regulatory restrictions and requirements in case they are registered as financial institutions and/or manage funds invested by certain types of investors, such as pension funds and insurance companies.

2.4 Are there any requirements or restrictions in your jurisdiction for public funds investing in digital currencies?

Brazilian-formed public funds cannot invest directly in digital currencies, as such type of asset does not fall under the definition of financial assets admitted for acquisition and negotiation by local public funds. However, the CVM regulations allow public funds to make indirect investments in digital currencies through the acquisition of interests in offshore vehicles and/or derivatives negotiated abroad, provided that such offshore vehicles and/or derivatives are regulated in the offshore markets where they are traded. Additionally, the Brazilian regulations require that the local fiduciary administrator and the investment manager make the appropriate disclosure to investors, conduct due diligence of such assets and offshore vehicles, and adopt monitoring practices to oversee the offshore administrator and/or investment manager of the offshore vehicles.

2.5 Are there additional requirements in your jurisdiction for exchange-traded funds?

Exchange-traded investment funds (“ETFs”) have the same legal nature of Brazilian-formed public investment funds, but are subject to specific CVM regulations (CVM Rule No. 369, dated January 22, 2002, as amended). The formation and running of Brazilian ETFs, as well as the public offering of their quotas require prior registration with the CVM.

Brazilian ETFs may be only formed as open-ended funds and their quotas are required to be admitted for trading on stock exchanges or organised markets (Brazil’s B3 S.A. – Brasil, Bolsa, Balcão). Brazilian-formed ETFs may be backed by variable-income and fixed-income indexes, and at least 95% of their net asset values (“NAVs”) must be invested in financial assets that compose the index, and liquidity purchased positions in future contracts.

3. Marketing of Public Funds

3.1 What regulatory frameworks apply to the marketing of public funds?

The marketing and distribution of quotas of public funds in Brazil shall be made by members of the securities distribution system (in general, financial institutions, brokerage entities, fiduciary administrators, among others), following certain requirements and disclosure of information and documents as required by the CVM regulations, and also by the ANBIMA codes and guidance.

As a rule, the distribution of quotas of open-ended public funds are not subject to registration with the CVM. The distribution of quotas of closed-ended investment funds requires prior registration with the CVM, except if made through an exempted public offering, with certain limitations on the type and number of investors that may be accessed by the distributors.

3.2 Is licensure with a regulatory authority required of persons (whether entities or natural persons) engaged in marketing activities? If so: (i) are there commonly available exceptions that may be relied on?; and (ii) describe the level of substantive regulation applied to licensed persons.

Yes. Quotas of investment funds are classified as securities under the applicable law, and their distributions require the participation of duly authorised members of the Brazilian securities distribution system, which is comprised of: (i) financial institutions and other entities with the purpose of underwriting securities (subject to registration and supervision of the Brazilian Central Bank); (ii) entities with the purpose of purchasing securities in the market and resale using their proprietary accounts; (iii) companies and individuals who intermediate the trading of securities in stock exchanges and over-the-counter (“OTC”) markets; (iv) stock exchanges; (v) OTC entities; (vi) brokerage of goods, special operators and the stock exchanges of goods and futures; and (vii) securities settlement and clearing houses.

Under the applicable laws, asset managers may act as distributors of quotas of investment funds under their administration or investment management, provided that they adopt specific policies and procedures in relation to the registration, of investors’ suitability and exchange of information, and appoint an officer responsible for the distribution activity.

3.3 What are the main regulatory restrictions and requirements in the following areas, if any, that must be complied with by entities that are involved in marketing public funds?

i. Distribution fees or other charges

Distribution fees are usually deducted from the fund’s management fee (received by the investment manager), usually calculated considering the fund’s net worth. Note that the CVM regulations prohibit the asset managers from receiving any indirect remuneration or benefit paid by related parties that would hinder or limit the asset managers’ independence in their asset management activities, requiring that any indirect payment or benefit must be transferred to the fund and consequently to its quota holders.

ii. Advertising

Any marketing material involving public investment funds must, among other requirements, contain specific disclaimers and information consistent with the bylaws and the fund’s factsheet (if applicable), and be drafted with simple, clear, moderate and concise language, alerting the investors to the risks involved in investments in funds. ANBIMA’s code for asset management also provides for certain rules for disclosure of the funds’ performances and other norms applicable for advertising of public funds.

iii. Investor suitability

The distributors of quotas of investment funds are responsible for carrying out suitability of the investors, which is made in accordance with the target investors of each of the investment funds.

iv. Custody of investor funds or securities

Custody fees are usually charged as one of the fund’s expenses and must be duly disclosed in the fund’s bylaws, with an indication about the maximum custody fee subject to payment by the fund, expressed as an annual percentage of the fund’s net worth.

3.4 Are there restrictions on to whom public funds may be marketed or sold?

Yes. The restrictions on to whom public funds may be marketed or sold are determined in accordance with the level of sophistication of the investors (i.e., retail investors, qualified investors and professional investors). The general concept, in line with one of the CVM’s fundaments (conferring protection to investors) is that the more sophisticated the investor is, the more risk an investor might be exposed to and, therefore, less protection may be granted to such investors.

3.5 Are there other main areas of regulation that are imposed with respect to the marketing of public funds?

No. The rules and guidance for the marketing of public investment in Brazil are provided by the CVM, as the regulatory body responsible for the registration and supervision of investment funds, and ANBIMA, as a self-regulatory entity. Certain types of investors, such as pension funds and insurance companies are also subject to other regulations provided by other Governmental entities like the National Monetary Council, National Superintendence of Complementary Social Security (“PREVIC”) and the Superintendence of Private Insurance (“SUSEP”), among others.

4. Tax Treatment

4.1 What are the types of entities that can be public funds in your jurisdiction?

As mentioned in question 2.1 (i) above, investment funds are structured in Brazil as a special unincorporated pool of assets (condomínios especiais).

4.2 What is the tax treatment of each such entity (both entity-level tax and taxation of investors in respect of allocations of income or distributions, as the case may be)?

As a general rule, investment funds are not subject to taxation on revenues and capital gains deriving from their own transactions (at portfolio level). However, there are certain exceptions to that rule such as financial revenues earned by real estate funds.

Therefore, Brazilian taxation will apply when income or gains are distributed from the investment fund to its investors.

In such case, the applicable taxation will vary taking into consideration certain aspects related to the fund (the fund’s nature and portfolio maturity) and the investor (type of investor, investment term and tax residency).

4.3 If a public fund, or a type of entity that may be a public fund, qualifies for a special tax regime, what are the requirements necessary to permit the entity to qualify for this special tax regime?

As mentioned above, public investment funds are generally not subject to taxes. Taxation applies at the level of the investor when income or gains are distributed.

There are certain tax benefits for non-Brazilian investors of public investment funds and a lower general tax rate.

Special tax regimes can also apply taking into consideration the type of investment fund (the fund’s nature and portfolio) and the investor.